The following is my response to questions about iPhone in China posed by China’s Mobinode.tv …

I read Mobinode.tv regularly and I appreciate the opportunity to share my views about iPhone coming to China.

I believe we are at the beginning stages of a mobile revolution. A new breed of smartphones is opening up an ocean of information, entertainment and communication to wireless consumers. The iPhone is at the forefront of this revolution and I’m optimistic that Apple’s smartphone, and devices to be unveiled later, will soon “officially” be launched in the People’s Republic of China (PRC).

Let me go right to your questions.

1) Can you give a brief introduction of yourself, your experience in mobile telecom industry and iPhoneAsia.com?

I am the Managing Editor of iPhonAsia – a website covering iPhone with particular emphasis in China, Japan and Korea. I live in the San Francisco Bay Area and enjoy business and leisure travels to the Far East.

Over the years I’ve held senior management positions in the financial services industry and was responsible for development of numerous Web 2.0 applications. My current focus is technology and telecom in the Pacific Rim. I’ve written several dozen articles on iPhone and mobile telecom and have developed friendships with journalists, telecom analysts and app developers across Asia. You can read my complete bio on iPhonAsia.

(2) Regarding Chinese market, according to your last post, the coming 3G iPhone seems to be without wifi function? If it is true, what’s your view on this?

There have been several rumors about WiFi being disabled on a customized iPhone for China (model A1324) that is reportedly in production right now. This rumor is most likely true. The only way for Apple to meet China’s requirements would be to develop an iPhone that includes China’s proprietary WAPI (Wireless LAN Authentication and Privacy Infrastructure). China’s past policy has prohibited WiFi on handsets. However in May, China’s Ministry of Industry and Information Technology (MIIT) changed the rules and approved a WiFi capable handset by Motorola. There was just one “catch.” This handset had to include WAPI. It seems that going forward, China will allow a WAPI/WiFi combination but not WiFi alone. The inclusion of WAPI adds extra expense to the manufacturing process and will require royalty payments. There may also be some user privacy concerns.

For China’s most tech-savvy power-consumers, WiFi will be important. As a result, I suspect smuggling of WiFi-enabled iPhones will continue to be a profitable enterprise. Apple will be a prime beneficiary as grey-marketers will continue to acquire full-price WiFi enabled iPhones in Hong Kong. In fact, on July 10, the iPhone 3GS went on sale in Hong Kong. The iPhone 3GS was also available SIM-unlocked via Apple’s online store in Hong Kong. The SIM-unlocked models sold out in a matter of hours! But not to worry, Apple (Foxconn/Hon Hai) will soon make more.

To keep things on the “up and up” (legal requirements) many of these SIM-unlocked iPhones have to make a two-way swim across the channel. They are manufactured by Foxconn in Shenzen, then shipped to a Hong Kong address and later smuggled back to the People’s Republic of China (PRC) for sale on the grey-market.

The HK price for SIM unlocked iPhone 3GS:

16GB HKD 5,388 ($695 US)

32GB HKD 6,288 ($811 US)

While some consumers in China may prefer grey-market iPhones with WiFi, there are many millions that have never used WiFi on their phones and have only experienced 2G speeds. For this group, WiFi might be a less important feature. They may be more interested in iPhone’s enjoyable user-experience, entertainment value and status.

I am certain that Apple and China Unicom have carefully considered the implications of selling a non-WiFi iPhone in the PRC. I suspect the official iPhone will come pre-loaded with many special “for China” apps, such as Youku and Hanwang’s HWPen (although nothing has been confirmed re the localization of iPhone for China). The official iPhone will also be less costly as no jail-breaking or hacking will be necessary to activate the iPhone or to load popular apps via Apple’s China App Store.

What are the keys to make the official iPhone for China a success?

Price – The non-WiFi iPhone must be priced below the grey market (WiFi-enabled) iPhones. It is possible that, as part of their negotiations with Apple, China Unicom has agreed to subsidize the retail price of iPhone. This subsidy will allow the “official” iPhone to be priced below grey-market iPhones.

During launch promotions, China Unicom and Apple must emphasize the benefits of owning an official iPhone with a warranty. An official iPhone will not have the “bricking” concerns that accompany grey-market iPhones.

China Unicom and Apple should promote how the iPhone is not a prisoner to fixed buttons and is designed to evolve. I have loaded software updates to my own iPhone several times and I have been amazed how my iPhone improves with age. Apple’s iPhone software updates often add new features/functions and speed. My iPhone is more valuable to me today than the day I purchased it (June 29, 2007).

(3) It has been said the App Store for China is under development. Can you share more details/opinions with us how the Apple store and iTunes would run in China?

Apple has now opened their App Store in many countries including Hong Kong and the PRC. Apple’s China App Store has been live for several months now. Many Chinese Netizens are unaware of the store as it is currently limited to iPod Touch owners only. I’m optimistic that Apple will be allowed to open their China App Store to iPhones. But this won’t happen until a deal is made official and China’s MIIT issues a network access license to iPhone.

I know that Apple has been working hard behind the scenes to further localize iTunes and their China App Store. I also believe that we will soon see many more apps, games and music for Chinese consumers.

There is some sensitivity around the inclusion of “games” on mobile devices (on Apple’s China App Store all games called “apps”). Right now the Nintendo DS is the only mobile gaming device that China has authorized. The iPod Touch and iPhone were not originally conceived as gaming platforms; yet, it’s hard not to notice how compelling the gaming experience can be on Apple’s mobile devices. I do not believe China’s MIIT will attempt to classify iPhone or iPods as gaming devices. The “genie is out of the bottle” (meaning that it is nearly impossible to go backward) and virtually every manufacturer’s handset could be classified as a gaming device. As a sidebar, I believe that Apple will launch an iTablet device (9.7 inch screen) within the next 12 months. This will be a powerful computer/e-book reader/gaming/music/entertainment/communications device.

As the saying goes – “imitation is the sincerest form of flattery.” I believe the success of Apple’s iPhone platform is a key reason China’s carriers have moved aggressively to develop their own:

Customized Android-based handsets designed to promote the carriers’ WVAS

China Unicom clearly has plans for their own mobile music services and app store. There is a possibility that Apple would be required to make use of China Unicom’s platform to deliver apps and music downloads. I’m sure this was batted back and forth during several rounds of negotiations. Yet I remain optimistic that China’s iPhone owners will be authorized to use Apple’s iTunes/App Store and that Apple won’t have to take on the extra expenses of integrating China Unicom’s nascent platform into the China iPhone’s OS.

In the final analysis, Apple and China Unicom will need to strike a balance between competition and cooperation when it comes to their respective platforms.

(4) In your opinion, what kind of pricing system would be attractive to Chinese users?

I will have to defer to those more knowledgeable on handset/services pricing in China. One thing I do expect is a modest subsidy for iPhone that will reduce the cost to consumers. This is not unprecedented in China. China Mobile is presently subsidizing all TD-SCDMA handsets.

One clue to possible pricing in PRC is the iPhone prices/plans now posted in Hong Kong. You can do some comparison-shopping here:

There are several attractive plans via Hutchison “3” in Hong Kong. You can buy the 16GB iPhone 3GS for HKD 4,080 ($526 USD) with a monthly tariff of HKD 138 ($17.80 USD). There is also one plan where the 16GB iPhone 3GS is “free” if you pay a monthly tariff of HKD 398 ($51.35 USD) for two years.

One thing I would like to see from China Unicom is an unlimited data-plan for iPhone. Virtually all carrier plans in China now charge users by the amount of data they consume (e.g. time spent visiting websites, downloading, etc.) and I’m sure iPhone owners would be interested in an unlimited data-plan option. This would also be important if the iPhone does not include WiFi.

One sidebar item: On July 8, an MIIT Vice Minister pronounced that mobile plans in China are “too high” and need to be reduced. China Unicom publically acknowledged the MIIT’s point and they have pledged to reduce plan costs. Update: (July 17) 3G power users can breath a sigh of relief. China Unicom announced a new price cap on data. No matter what kind of 3G packages users have chosen, their monthly mobile phone Internet fees will be capped at CNY500

(5) From your observation, what’s the key opportunity/challenges for iPhone in Chinese market?

Key opportunities for Apple in China:

There are over 700 million wireless consumers in China. The majority are youthful, status conscious, and they want to own cool smartphones loaded with the latest apps/games and mobile technologies that allow them to interact with one another.

While incomes are lower in China compared to western markets, China still has tremendous consuming power. There are an estimated 340,000 millionaires in China and there is also a growing middle-class. An estimated 290 million Chinese households can be classified as middle-class with monthly incomes ranging from 5,000 CNY to 15,000 CNY ($732 to $2,196 USD). Chinese tend to save a relatively high share of their monthly take home pay. Rainy day savings can sometimes be spent on more expensive items, particularly if the product has status and is used every day … think iPhone.

All of this adds up to a tremendous potential market for Apple’s iPhone. Using conservative estimates*, I believe Apple can capture a full 2% share of the wireless market in China within the first 12 months of an official iPhone launch. That’s 14 million iPhones and perhaps another 2 million or so coming via grey-market iPhone sales.

There has been some speculation that Apple may introduce a new low-price iPhone model sometime in 2010. This model might be an unlocked “2G only” iPhone designed for prepaid markets, where the majority of wireless consumers prefer to “pay-as-you-go” (not on contract). A low-priced iPhone could double or triple my iPhone sales projections. If a low-price iPhone model is introduced in the first half of 2010, I would project that Apple can capture 4 to 6% of China’s handset market by the end of 2011. That’s 28 to 42 million iPhones.

*I should emphasize that there are many unknown variables at present that can affect iPhone sales prospects. We will know much more once the official “iPhone in China” details are revealed.

Key challenges for Apple in China:

First and foremost is Apple (iPhone) obtaining a network access license (NAL) from China’s MIIT. The NAL is currently gating a formal iPhone deal announcement and an official iPhone launch. If recent rumors are true, the NAL may be issued before the end of summer.

One challenge for both China Unicom and Apple will be to ensure that the WCDMA 3G network coverage is fully deployed. On May 17 China Unicom rolled out the first 55 cities on their new WCDMA 3G network. On June 30, China Unicom announced the secondary rollout to 44 additional cities. By year-end 2009 there should be 284 cities in China with WCDMA 3G coverage.

Building regional infrastructure (staff and facilities) and an iPhone sales network in China is an important task for Apple. Apple has store locations in Beijing at Sanlitun and soon at Qianmen Street, but the scarcity of Apple stores make this an impractical way to sell iPhones in the PRC.

iPhones will most likely be distributed through China Unicom’s vsnes.com division and may require partnerships with Wal-Mart and Best Buy (Five Star Appliance). There was also a media report that Foxconn’s Cybermart would sell iPhones in China, although both Apple and Foxconn denied this rumor

It will also be important for Apple to work with Chinese authorities to protect Apple’s intellectual property. Shanzhai ji counterfeit phones (“Shanzhai” culture is a rebellion against the monopoly sectors) are everywhere and many of these cheap knock-offs cross the boundary of imitation and into the realm of outright rip-off. While there are many Shanzhai ji iClones (iPhone look-alikes), no major manufacturer is immune to the bandit phones phenomena.

As a side point of interest, the Shanzhai (“bandit phones”) market in China has grown exponentially in the last few years. Virtually all brand name phones have a Shanzhai ji look-alike. Government authorities will admit that approximately 25% of all phones sold are Shanzhai ji knock-offs, but the real numbers may be closer to 50%. The Shanzhai ji economics are compelling. A bandit phone entrepreneur can drive his Ferrari over to Hong Kong and acquire chipsets and components from MediaTek and other suppliers and quickly set up an assembly line. These backroom operations often sprout up and disappear in a matter of months. It only takes a small team of engineers a few weeks time to prototype their next bandit phone. A Shanzhai entrepreneur might knock out a phone for about 300 CNY ($44 USD) and sell it for 600 CNY ($88 USD) with no pesky government taxes or licensing fees to cut into the fat profit margin. If the entrepreneur sells 23,000 units, he is now a millionaire. The bandit production operation will then shutdown only to appear again in another obscure warehouse. Rinse and repeat.

Of course you get what you pay for. I had an iPhonAsia reader write to me recently to complain about the “iPhone” she purchased while on holiday in Shanghai. It had poor audio quality, a screen pixilation problem, and after six weeks of use, it no longer worked. When I wrote her back inquiring about how/where she came to buy this phone, she confessed that it “really looked like an iPhone” but when she took it to the Apple store, the Genius instantly recognized she had purchased a counterfeit iClone. “Ah, that explains why it was so inexpensive.” Yep, there’s one born every minute.

Another matter for Apple’s legal team is the iPhone trademark. The iPhone name in China is partially owned Hanwang Corporation. I believe this naming rights issue will be resolved amicably. Apple and Hanwang have played nice together before. Apple bought the rights to Hanwang’s specialized iPhone character recognition app in 2008 and demoed the technology during the 2009 WWDC Keynote.

Another challenge for Apple is to get China’s telecom industry to understand that Apple’s platform is not a threat to carriers’ own services. If anything, iPhone has spurred a tremendous acceleration in carriers’ plans to build out their own eco-systems. You can read more on this topic on iPhonAsia.

In the end, I expect that iPhone’s official introduction in China will benefit both Apple and their carrier partner(s) in China. Perhaps the biggest beneficiary will be China’s wireless consumers.

(6) Regarding ecosystem for iPhone, can you talk about the difference you have observed between Asia and western market?

Apple’s iPhone platform or “ecosystem” consists of several important value-added services, including:

iTunes (music, videos, podcasts, e-books & courses via iTunesU)

App Store (apps and games)

MobileMe (cloud storage and file sharing)

Chinese consumers often find pirated MP3 music and cracked apps/games on torrent sites. Consequently there are far fewer paid downloads in China than in western markets. Despite this problem, when content delivery is tightly controlled (e.g. ringtones) it can be very profitable for carriers and other value-added services providers.

Another major difference between China and the west is the method of paying for goods and services. Transactions in China are primarily “cash and carry.” The vast majority in China do not own a major bank credit card. Consequently, Apple may need to craft some creative ways (e.g. some type of prepaid iTunes plan) for consumers to pay for music and app downloads. If Apple can make it convenient for those without credit cards to pay for content, this might stop some of the download piracy.

Given the major youth demographic in Asia (majority of the population is under age 30), a large share of disposable income is spent on mobile phones when compared to western markets. One reason that phones are so popular in China and many markets in Asia, is the simple fact that many do not own desktop or laptop computers. Cyber cafes can be expensive and mobile handsets are often the only way to connect to the world. As a side note: Since computer ownership is rare in China, Apple and China Unicom may need to provide in-store kiosks or other means for iPhone owners (who don’t own a computer) to easily complete their own software updates or app downloads.

Young people love to chat on the phone, connect on the Net, play games, listen to music, and send instant messages. While IMs are popular in all global markets, Asian youth are in the lead when it comes to the sheer number of text messages they send. The average urban mobile user in China sends 4 text messages per day. During the Chinese New Year there were over 1 billion text messages sent in China!

Mobile gaming is also extremely popular throughout Asia. Social gaming in particular is a fast-growing segment. So too are social network sites where youth can interact. It is interesting how China’s one child policy may have affected the popularity of social gaming. Without siblings to play with, many children turn to mobile games to interact with peers.

(7) Is there big difference between Asian countries? We know iPhone in Japan is going very well, how about Korea and other areas?

3G networks are very mature in both Japan and South Korea. As a result, mobile TV, wave-to-pay (phone as a payment card) and other advanced 3G services are widely in use in both countries. There are also many advanced 3G handsets in Japan and Korea, but they seem to suffer from a fatal flaw. The user interface and software are not always intuitive, and many get lost attempting to use handset features. In contrast, the iPhone is highly intuitive. Most new iPhone owners never bother to consult the instruction manual. No need. It just works, and in such a logical and clever fashion.

iPhone received a modest but positive reception Japan. It has been estimated that iPhone 3G sold about 800,000 iPhones in Japan since the 2008 launch. The recent (June 26) iPhone 3GS launch in Japan was a major success. The launch day lines were long and many stores rapidly sold out of their initial supply. The enhanced camera and video capability on iPhone 3GS appear to be very popular with Japanese consumers.

Apple has not yet reached an iPhone accord in South Korea. The deal is still being negotiated, but there have been some encouraging developments. iPhone has now completed extensive radio research laboratory testing, and in May, the Korea Communications Commission (KCC) formally approved the iPhone 3G. More recently (July 12) the KCC also approved the new iPhone 3GS. Both iPhone models include WiFi.

Korea Telecom has been the most aggressive in pursuing a deal with Apple, but SK Telecom may also be in the running. I suspect there will be a race between China and South Korea to see which country is the first to officially launch iPhone. The smart bet might be on South Korea. It’s going to be a close race!

(8) What are the most impressive achievements in your mind for iPhone in Asia? How would you foresee the trends of iPhone application in the coming years?

iPhone is too new in Asia to count off a list of impressive accomplishments. I guess you could count as “impressive” the approximate 1.3 million real albeit “jail-broken” iPhones now in use in China. The average selling price of these grey-market handsets has ranged from 3,075 to 6,150 CNY ($450 to $900 USD) and despite the grey-market mark-up, the demand has been quite strong.

It was also impressive to see the positive reception that iPhone 3GS has experienced in Japan and in Singapore. For a better appreciation of numbers in line for iPhone in Singapore, have a look at the video made on a new iPhone 3GS by Satya, who was 10th in line for the July 10 launch.

Regarding trends in applications? … Games and massively multi-player online games (MMOGs), such as World of Warcraft, are hot and I expect that new MMOGs will be introduced in China with versions for iPhone. The iPhone 3.0 software allows for “in app” purchases and new revenue opportunities (e.g. virtual goods) for gaming companies. Many who would not initially pay to download the game, are eventually drawn into the game and find that they are willing to buy virtual goods. For example, gamers can use virtual currency to buy a prettier dress for their dance character or a more intimidating weapon for their warrior. Many gamers in China have even traded virtual currencies and exchanged them for real goods. Last year, nearly $2 billion in virtual currency was traded in China. This has caught the attention of authorities and China is moving to regulate virtual currency.

I am also looking forward to mobile payments and wave-to-pay apps on iPhone. Wave-to-pay would be convenient for those who buy lattes at Starbucks or fast-food at KFC. Wave-to-pay on handsets might also replace public transportation IC cards for regular commuters. I expect that in the future it will be possible to swipe your iPhone across a scanner to pay for almost any item.

There is literally no end to the possible directions and numbers of games and applications that might be developed for iPhone, iPod Touch and future Apple devices. Just think about the astounding growth we’ve seen in just one year. The Apple App Store turned 1 year-old on July 10 and there are now over 100,000 registered developers who have created 65,000 iPhone apps. Most impressively, the App Store has now surpassed 1.5 billion downloads!

Shanghai. January 23. INTERFAX-CHINA – China added 93.92 million new mobile phone subscribers in 2008, pushing the country’s total figure up to 641.23 million, while fixed-line subscribers reached 340.8 million, down 24.83 million from the end of 2007, according to statistics released by the Ministry of Industry and Information Technology (MIIT) on Jan. 22.

The head of China Mobile, the world’s largest mobile phone group, said the country’s homegrown third generation mobile technology was “a few years behind” other international standards because of problems with handsets.

…Wang Jianzhou, China Mobile’s chairman and chief executive, said: “[TD-SCDMA’s] network operation is normal but there are still a lot of problems. Problems remain in handset choices, quality, performance and prices, where most users complained.

“Compared with other 3G technologies, TD-SCDMA is still a few years behind.”

While there certainly have been plenty of stories about handset problems, the China Economic Review makes an interesting point:

The head of China Mobile, the world’s largest mobile phone group, said the country’s homegrown third generation mobile technology, TD-SCDMA, was ‘a few years behind’ other international standards because of problems with handsets.

(Which is interesting because although there has been much criticism of the handsets most of the complaints have been about the spottiness of the coverage and that is NOT a function of the design or build of the handset.)

For whatever reason, there seems to be a growing consensus that TD-SCDMA apparently sucks eggs. China Mobile had better sort this out, as its rivals are ready to blow a lot of cash and roll out tried and tested CDMA2000 and WCDMA networks within a year or so. But China Mobile, with a huge user base, may have a shiny, small, white knight to save the white elephant. MacNN, citing the 21st Century Business Herald, reports:

Apple and China Mobile are in fact in the “final stages” of negotiations for brining the iPhone to China, writes the state-owned 21st Century Business Herald. The account follows a report from China Communications, which claimed similar progress in talks, and that China Mobile was ready to provide a hefty subsidy, similar to that provided in other countries. The assistance is particularly important in China, where the majority cannot afford an unsubsidized smartphone.

CMiC: can’t afford an unsubsidized iPhone? The hacked models that are everywhere here cost more than the base US$199 price for the new 4GB iPhone 3G. I doubt that your average farmer in Jiangxi is the target customer.

It’s not that the technical problems of TD-SCDMA can be solved by the iPhone, even Steve Jobs can’t do that. It’s the absolute berserk frenzy that a TD-SCDMA-enabled, cheapish, iPhone 3G would cause. The hacked older model iPhone has become a common accoutrement for China’s mobilerati. Imagine their reaction to a GPS-enabled 3G model.

A big China Mobile-Apple iPhone 3G announcement for the China market would quickly bury all the negative press over TD-SCDMA performance with an avalanche of gee-whiz press coverage and Apple’s cool cachet. China Mobile should move quickly to make the deal.

So cheer up Mr. Wang, positive media hype is only a phone call away (er, you may want to use your landline, though).